Will Japan’s honeymoon with ‘Abenomics’ last?

Will Japan's honeymoon with Shinzo Abe last?

Getting out of deflation can’t be done by monetary easing alone. It’s not a fix-it-all. It’s not a magic wand

TOKYO — Hopes are high in Japan Inc. for the new prime minister. Stocks are recovering. The central bank is set to supercharge an already loose monetary policy. The soaring yen, a big minus for exporters, is reversing course.

The bullish mood in the air is all about “Abenomics” — a reference, as dubbed by experts and market players, to Shinzo Abe, the shoo-in comeback prime minister when Parliament votes next week.

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But experts are already wondering how long that celebration is going to last.

“This is just the honeymoon,” said Masaaki Kanno, chief economist at J.P. Morgan in Tokyo.

Abe has made reviving the economy a priority, and is pushing for a 2% inflation “target,” double the central bank’s “goal” now.

That’s designed to fight a problem that was until recently relatively unique in the world — deflation, or continually dropping prices, which deadens economic activity. The Japanese economy has been stuck in deflation for two decades.

The Bank of Japan, ending a two-day policy board meeting Thursday, further loosened its super-easy monetary policy, pumping more money into the financial system by expanding its asset purchase program by about 10 trillion yen (US$119 billion) for a total of 101 trillion yen (US$1.2 billion).

The bank has now eased monetary policy five times this year. Japan’s benchmark interest rates are already at zero.

The central bank also paid respect to Abe. It said it will consider pricing goals and report back at the next meeting in January. Bank of Japan Gov. Masaaki Shirakawa made clear in his news conference after the meeting the bank was responding to Abe’s requests.

“One by one, my election promises are becoming realized,” Abe told reporters, noting Shirakawa had telephoned him to assure him that monetary easing will be enhanced.

Abe’s pro-business, conservative Liberal Democratic Party was voted back into power in a landslide in Sunday’s elections.

Before a change of power in 2009, the party ruled virtually without interruption for a half-century, engineering Japan’s stellar growth into the world’s third-largest economy.

Besides generous promises to boost public-works spending — by as much as 10 trillion yen (US$119 billion), according to party officials — Abe is pressuring the central bank to work more closely with the government.

Such pressures are a departure from the past. But they are also growing in other parts of the world, including in the U.S. and parts of Europe.

What remains unclear is exactly how the 2% inflation target will be achieved. A weakening yen, though favourable for Japanese businesses, is likely not enough to get a lagging economy back on course.

In the long run, Japan needs widespread economic reforms, opening up of markets and freeing up of tight protective regulations, to get new life back into the economy, analysts say.

Job growth in recent years has been limited, often in low-pay part-time sectors. Hopelessness among the young generation is intensified by the prospect of having to foot the bill for one of the world’s most rapidly aging societies.

“Getting out of deflation can’t be done by monetary easing alone. It’s not a fix-it-all. It’s not a magic wand,” said Katsuyuki Hasegawa, chief market economic at Mizuho Research Institute. “You need a whole package of measures.”

A new business mentality is also needed, one that nurtures young entrepreneurs like Reina Otsuka, 32, who runs her own online business called “eco+waza” selling Japanese ecological products, like cast-iron rice cookers and charcoal deodorizers, for the global market.

The government hasn’t been much help to Otsuka’s efforts in the past, but she had hopes for Abe, at 58, a young leader by Japanese standards, and prime minister in 2006-2007.

“It is nice that he is still young. I hope he can show leadership,” she said, expressing hopes the government will let the private sector alone and get on with business.

So far, Abenomics is on a roll.

The benchmark Nikkei soared earlier this week, although it lost some of the gains Thursday. The dollar has recovered to mid-84 yen levels from below 80 yen levels in recent months.

Toyota Motor Corp. President Akio Toyoda welcomed Abe’s pledge to work with the Bank of Japan, and expressed hopes the yen would keep sinking.

Still, Abenomics is not without risks.

So much of its best scenario relies on the confidence people have in Japan’s ability to sustain ballooning public debt, estimated at more than 200% of its economy, or gross domestic product. That debt will rise if Abe executes his plan for more spending.

Government bonds have remained stable so far. But if that confidence is lost, bonds could lose their perceived safety and that would endanger the country’s ability to borrow, Kanno warned.

Setting an inflation target is a tricky idea, Kanno said. If a C student has been failing at trying to get a B, is targeting an A going to make a difference?

And the idea that people will go shopping, expecting prices to go up later, is just ridiculous, he said. People will jump to start consuming — only when they see prices shooting up.

“It takes a long time to get out of deflation,” Kanno said. “One needs to proceed with caution.”

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